With Republicans and Democrats holding slim majorities in the House and Senate, budget negotiations will involve a lot of horse-trading. High on progressives’ list is restoring enhancements to the child tax credit that expired at the end of 2021.
Current tax law provides $2,000 per child under 17 for couples with an annual adjusted gross income up to $400,000 — $200,000 for single parents. Benefits phase out over those amounts, and the credit is partially refundable — if no taxes are owed, up to $1,500 is offered to parents earning at least $2,500.
The American Rescue Plan increased benefits to $3,000 per child — $3,600 for those younger than 6 — but lowered phase-out thresholds to $150,000 and $75,000.
Restoring those benefits is contentious, because the program is a major reason about 40% of all tax filers pay no income tax, and restoring the benefits would take that figure to about 50%.
This prejudices lower-income families to vote for ever more generous government spending.
The child tax credit was originally a conservative idea included in Newt Gingrich’s 1994 Contract with America, and a nonrefundable $500 credit was created by the Tax Relief Act of 1997. It was increased and made partially refundable by former President George W. Bush and bumped up by then-President Donald Trump in the 2017 Tax Cut and Jobs Act.
The original idea unleashed a succession of tax credits, including the earned income tax credit, child and dependent care tax credit, and educational tax credits.
Along with Section 8 housing, food stamps and Medicaid, these form a sizable disincentive to work. Phase-out provisions can impose effective marginal tax rates exceeding 50% for low-income families.
Often cited by advocates for restoring pandemic-era benefits, a National Bureau of Economic Research study of mostly low-income single mothers found those imposed few adverse consequences for employment. But this was based on a simple question: Are you employed, looking for work, or not looking?
The bump to the child tax credit was brief, making it unlikely to influence that behavior. The current program encourages limited part-time employment — the income threshold can be met with 250 hours of work per year.
A Becker Friedman Institute study found some reduction in labor force participation, and a Joint Committee on Taxation study projected the same for reinstating added child tax credit benefits.
How much these enhanced benefits reduced poverty has been subject to a much-distorted debate. Progressives like to tout a Columbia University study that showed a 25% reduction in poverty during the pandemic. It estimated that by adding the enhancements to incomes prior to the pandemic. Data for 2021 incomes was not yet available to researchers.
When 2021 income data became available, a recalculation by the Becker-Friedman researchers found a much smaller impact on poverty. The culprit was likely many fewer hours worked by parents receiving enhanced benefits.
From a policy perspective, it’s important to stay focused. The primary purpose of the child tax credit, food stamps, subsidized school lunches and Medicaid is to help children, and society is better off for ensuring that those born into low-income families have a floor under the resources available to raise and educate them.
Beyond early childhood and adolescents, that’s why we have low tuition at state and city-sponsored universities.
Yet it’s terribly difficult to disentangle the benefits targeted to the children through parents and work disincentives that come from low or no minimum earned income requirements for refundable tax credits and other benefits.
Sen. Mitt Romney, Utah Republican, has proposed raising the child tax credit to $4,200 for kids under 6 and $3,000 for those 6 to 17, but full benefits would require adjusted gross income of $10,000. He would fund the program by closing some tax loopholes.
Unfortunately, that would continue terribly high effective marginal tax rates that come with means-tested programs.
It would be better to roll up all means-tested programs into a single refundable tax credit for each adult and child regardless of income but require full-time work for full benefits. Each working-age adult would have to show proof from an employer of a minimum of 30 hours of work weekly or a yearly adjusted gross income of $20,000.
If the taxpayer was unemployed for part of the year, credit could be given for the weeks he qualified for state unemployment benefits.
The program could be funded by a payroll tax — upper-income earners would receive fewer benefits than the taxes they paid but lower-income workers more benefits than the taxes they paid. Income taxes could be cut by the amount collected by the payroll tax.
Lower administrative costs and excluding from eligibility adults who refuse to work could actually save money and reduce the budget deficit.
A universal floor under incomes would provide parents with adequate resources, remove large jumps in effective marginal tax rates for low-income adults and encourage everyone to work.
• Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.